Hedge funds key in future liquidity drive says State Street

State Street research reveals hedge funds will have a critical role as a market maker in providing liquidity.
By Paul Walsh
Hedge funds will play a pivotal role as a liquidity source in future market value chains according to latest research from State Street.

Research conducted by the custodian bank on the liquidity opportunities in the current market environment surveyed 300 respondents, comprised of 150 asset owners and 150 asset managers including 50 hedge funds.

Results show that 42% of participants consider that the role of hedge funds as liquidity providers will continue to expand while 47% of participants believe that continued market volatility will demonstrate the value of hedge funds as a liquidity provider.

“What the industry needs to look at when it comes to accessing liquidity is asking what are people going to do and what are the opportunities?” said Alex Lawton, head of securities finance for EMEA, State Street.

“We have seen a real shift in dynamics between new participants coming into the market and how they can interact with other market participants going forward.

“A lot of people within the industry are currently talking about hedge funds as becoming market makers in terms of liquidity.”

Recent industry developments have focused on how global liquidity can be increased.

Earlier this month, a BNY Mellon report revealed that three-quarters of sovereign institutions have said they would increase their securities lending in a bid to boost global liquidity.

The poll of 24 sovereign firms found 75% of sovereigns agree they “have a role to play in increasing liquidity”.

Other results from the State Street research show 49% of respondents feel the role of other non-bank institutions as market liquidity providers will grow and Lawton believes this may be due to regulatory impact.

“The changes in regulation that we have seen coming through the markets have changed the capacity in the value chain,” said Lawton.

“This may be down to issues such as Basel III which has impacted people’s decision making on what they do in terms of holding capacity to market make and how to provision their finance.“

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